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China TechFaith Wireless Communication Technology Limited (NASDAQ:CNTF)

Q1 2014 Earnings Conference Call

May 20, 2014, 08:00 AM ET

Executives

David Pasquale - Investor Relations, Global IR Partners

Yuping Ouyang - Chief Financial Officer

Jay Ji - Senior Vice President

Analysts

Richard Safranek - Wafra Investment Group

Operator

Good day, ladies and gentlemen, and welcome to TechFaith's first quarter 2014 earnings conference call. My name is Ian, and I'll be your operator for today. (Operator Instructions) Now, I'd like to hand over the call to Mr. David Pasquale of Global IR Partners. Please go ahead.

David Pasquale

Thank you, Operator. Welcome everyone to China TechFaith's first quarter 2014 financial results conference call. Joining us today from the company are Chief Financial Officer, Ms. Ouyang Yuping; and SVP, Mr. Jay Ji.

We will have time for your questions after a review of the company's financial results from the quarter and its business outlook. If you have not yet received a copy of today's results release, please e-mail Global IR Partners at cntf@globalirpartners.com or you can get a copy of the release off of the Investor Relations section of TechFaith's website.

The company's attorneys advise that this call will contain forward-looking statements. TechFaith may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission and at the annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties.

These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, confident, outlook and similar statements.

Statements that are not historical facts, including among other things statements about TechFaith's business outlook, strategic and operational plans, beliefs and expectations contain forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements.

Potential risks and uncertainties include, but are not limited to those risks outlined in TechFaith's filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 20-F and other SEC filings.

TechFaith undertakes no obligation to update any forward-looking statement except as required under applicable law. All information provided on today's conference call is as of today's date.

References to U.S. GAAP or to Generally Accepted Accounting Principles as practiced in the United States of America and references to dollars are to the lawful currency of United States of America.

At this time, I'd like to now turn the call over to SVP, Mr. Jay Ji. Please go ahead, sir.

Jay Ji

Thank you, David. And welcome to our first quarter 2014 financial results conference call. I hope that everyone had a chance to review our press release.

Overall, the first quarter was negatively affected by seasonality due to Chinese New Year holiday. Our revenue was 16% lower than Q4 and about 7% lower than the year-ago period. The environment remains very challenging in our market.

Competition remains. Mobile product continue to have average selling price pressure from the last cycles and the lower unit shipment due to the larger number of competing products. As a result, revenue declined in our game and brand name phone business segments.

Revenue in our game segment in Q1 was $120,000 compared to $2.1 million in previous quarter and $3.4 million in the same quarter last year. This reflects higher competition and the discontinuation of shipments of motion game controller.

Revenue in our brand name phone business segment was $2.7 million in Q1 compared to $5.4 million in previous quarter and $10.3 million in the same quarter last year. The main factor in this was high competition in the retail mobile phone market.

We had some positive signs in our ODP business segment with revenue relatively stable at $23.3 million compared to $23.7 million in the previous quarter and up from $14.5 million in the same quarter last year. That reflects stability in our smartphone equipment and growth in international market of [ph] certain lower domestic China revenue.

We continue to adjust to the market in both the gaming and the brand name segments as well. We are making progress and are seeing pockets of potential improvement. We expect to face deep competition on a challenging market environment for the foreseeable future. This is the core nature of the markets we operate.

On longer-term basis, we remain confident in the niche segment model we have been pursuing. For example, our smart ruggedized devices have been successful and we were able to extend the concept to other models.

Part of the longer-term attractiveness of our line is that ruggedized offerings are suitable for both the consumer and brand segments. We believe in the capabilities of our product and our ability to capture new and existing opportunities.

In terms of other color on Q1, our gross margin was 7% due to our lower revenue level, lower selling price and product mix, including lower selling price on some of our mobile phone models to certain customers and the higher design costs of certain models. Net loss for Q1 was 7% per basic and diluted ADS.

Even with lower revenue levels, we have been able to maintain profitability in prior quarters. We are focused on moving back to profitability on both the revenue and the cost side. Our management is definitely not satisfied with this result as well as our Chairman and CEO.

In terms of segments in Q1, our ODP business contributed 89% of total revenues. And our branded mobile phone business contributed just over 10% of total revenues. Gaming was below 1%. We remain focused on building brand awareness, developing unique android software applications and ruggedized mobile devices for consumers, enterprise and outdoor segments.

As I just mentioned, our ruggedized devices smartphone series have been well received by the market and we have continued the trend to include ruggedized PAD and Note for both consumer and enterprise markets.

We have also continued to expand our presence by advertising in both traditional and new media. For example, our advertisements can be found in the travel magazines, several airlines, such as Air China and also our high speed railways. Our commercial advertisement can also be found on China's several channels.

We are also marketing our activities and events through new media, such as WeChat and Weibo. These high profile advertisements are important in building our brand and reaching our targeted customers.

Now, let me turn the call over to our CFO, Ouyang Yuping, for further review.

Yuping Ouyang

Thank you, Jay. Thank you to all for joining our first quarter earnings call. Let me quickly review some key operating points and our outlook before taking Q&A.

Revenue for the first quarter was $26.2 million compared to $31.2 million in the previous quarter and $28.2 million in the same quarter last year. Our ODP business contributed $23.3 million or 89% of the revenue. Our brand name mobile phone business contributed $2.7 million or 10% of the revenue and our gaming business contributed $0.12 million or below 1% of our total revenue.

Although, we have seen some stability, as Jay just noted, we continue to impact a very challenging business environment. For example, our gaming business experienced a steeper decline in this quarter. This was both due to overall weaker demand and business transitioning from hardware-centric controller sales to the current model focusing on building user base.

Overall, gross profit for the first quarter of 2014 was $1.9 million compared to $4 million in the previous quarter and $4.6 million in the same quarter last year. Our operating expenses were $6.3 million compared to $8.8 million in the previous quarter and compared to $4.2 million in the same quarter last year. There was some increase in selling and marketing activities this quarter.

In terms of our balance sheet, we ended the first quarter with a balance of $258 million in cash and cash equivalent. The decline of $7 million compared to the prior quarter is primarily due to our capital expenditure on equipment and facility constructions.

With regard to the ongoing development of our real estate portfolio, we acquired land use rights and started the construction of building and facilities in Hangzhou, Beijing and Shenyang of China. In Hangzhou, we had invested approximately $42.9 million in the construction of three buildings of a total area of 43,500 square meters.

In Beijing, we remain on scheduled target completion of the construction of 16 buildings by the end of this year. These 16 buildings would have a combined total area of about 73,500 square meters. By the end of the first quarter of this year, we have invested approximately $23.8 million for this project.

In Shenyang, we expect to complete one building with an area of 10,270 square meters in this year. By the end of the first quarter, we have invested approximately $8.1 million for Shenyang project.

When added together, we have invested about $74.8 million on the development of our real estate portfolio. We expect to incur an additional total capital expenditure of $190 million for the next three years from 2014 to 2016. Additionally, we expensed about $1 million in the continued development of our facilities in this quarter.

In terms of our specific guidance for the second quarter, as noted in our press release, we currently expect total revenue in the second quarter of 2014 to be in the range of $22 million to $26 million. This forecast reflect earlier mentioned continued competitive measure and challenging business environment we revealed earlier, the market we operate in remain very difficult, but we remain focused.

Operator, that concludes our formal comments, we are now ready to take questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) We have a question from Richard Safranek at Wafra Investment Group.

Richard Safranek - Wafra Investment Group

I don't know where to begin. But let's begin with what you're saying about the competitive environment that you face. Quarter-after-quarter you continue to post terrible, terrible performance numbers. And you give guidance that there is little hope of any recovery in the near-term. At what point do you think you should just get out of the business that you're in, because clearly you have no competitive advantage and your confidence really comes into question?

You say what a strong balance sheet you have, but investors have to look at that balance sheet, and think, well, if you're going to continue in this business where you have no confidence, you'll just run that balance sheet down. Now, admittedly your burn rate isn't that great, which is fine. But when do you realize that you can't compete anymore, you're not going to be [indiscernible], you're not competitive at all. When do you exit your core business?

Jay Ji

Well, I don't think that you are right.

Richard Safranek - Wafra Investment Group

The numbers speak for themselves, you can say -- you know, I think I'm right?

Jay Ji

Many companies they do have some tough time, and you are right, somehow this is a very competitive industry. And we are focusing on our business. If you take a look at our ruggedized product, we do have some customers, given the shipment is not big enough, but we are confident of our future. Once we have our products shipped, and although we are going to bigger, more customers, and also with this kind of high gross margin product, we believe our business can be back to the right track again.

Operator

Thank you. There is no further question at this time. So I will turn to management for closing remarks. Thank you.

Jay Ji

Well, thank you everyone for participating in today's call. We look forward to speaking with you on our next quarter results call. Please feel free to follow-up with us if you have any additional questions. Bye, bye.

Operator

Thank you, sir. Ladies and gentlemen, that concludes your conference. You may now disconnect. Thank you for joining us. Do enjoy the rest of your day.

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